Though it may be picking an unsteady time in the commercial mortgage business to double down, BB&T Corp. cast its deal to buy a large specialty lender as a chance to combine two conservative originators.
Thomas S. Dennard, the chief executive of BB&T's Laureate Capital LLC unit in Charlotte, said the deal for Collateral Real Estate Capital LLC of Birmingham, Ala., would unite a pair of companies that have grown in recent years through strategic acquisitions and adhered to "plain vanilla" commercial lending while avoiding the aggressive underwriting practiced by some of their competitors.
The acquisition would more than double Laureate's commercial real estate servicing portfolio, to $20 billion. Collectively, Laureate and Collateral had about $8 billion of production last year, and about 35% of the flow was commercial mortgage-backed securities, Mr. Dennard said in an interview Thursday.
"We have both focused on stabilized properties" in need of refinancing rather than construction lending, he said. "What has gotten our industry in trouble is its dealings in nonstabilized properties. With this deal, we're putting together two businesses that have generally been risk-averse."
Because of that approach, the combined company (which is to be renamed) would have ample opportunity to conduct business with Fannie Mae and Freddie Mac, among others, Mr. Dennard said.
"This deal is not driven on doing CMBS business. If that had been the deal, we would've pulled out [of commercial real estate] two months ago," he said. "We see the CMBS market recovering, but the existing environment demonstrates why we offer other products."
Jeff Davis, an analyst at First Horizon National Corp.'s FTN Midwest Securities Corp., said the deal makes sense for BB&T because it would allow the Winston-Salem, N.C., company to "double up in what has historically been a really good business." Though spreads on CMBS deals have widened in recent weeks, the business remains sound overall and the servicing component supports deposit balances.
"I wouldn't be too concerned over this deal," said Mr. Davis, who noted that the combined servicing portfolio would be small compared to KeyCorp's $123 billion portfolio. "Commercial real estate lending for the most part still looks completely fine," he said. "The stress right now … is really on residential construction."
Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, said that this one adds to a long list of niche deals by BB&T to increase fee revenue but that it is not large enough to alter the company's risk profile. The current liquidity crisis will eventually pass, but perhaps it was substantive enough to encourage Collateral to make a deal with a larger competitor, Mr. Fitzsimmons said.
Mr. Dennard said that Collateral had approached BB&T about a merger, though he would not say why it did so.
Laureate and Collateral have grown incrementally through acquisitions. The $127.6 billion-asset BB&T bought Laureate in 2000 and subsequently bought R.J. Twitty & Co. of Tampa, which had a $275 million servicing portfolio, and bought a $325 million servicing portfolio and loan origination platform from Wilson & Nolan Southeast Inc. of Atlanta.
Collateral has expanded into markets such as Dallas and Kansas City, Mo., by acquisition, Mr. Dennard said. Those two would be new markets for BB&T, which would also enter Chicago and Minneapolis by acquiring Collateral.
BB&T and Collateral did not disclose the price of their deal, which is expected to close in the fourth quarter.
Mr. Dennard said Laureate and Collateral have complementary portfolios and keep very few loans on their balance sheets. Laureate, however, has had more success servicing its originations, he said.
Laureate's largest concentration of production last year was retail properties, which made up 35% of its activity. Multifamily properties made of 21%, hotels 20%, and offices 17%. About 45% of Collateral's production last year was multifamily properties such as senior housing; 20% was office properties; 17% retail; and 7.5% industrial.
Clark Starnes, BB&T's manager of specialized lending, told American Banker in April that the company was pursuing commercial mortgage acquisitions as part of a strategy to boost specialized lending's contribution to the company's bottom line. Unlike most of the company's other specialized lending businesses, commercial mortgage contributes to fee revenue, he said.
"We've had a compound average growth rate of around 20%" in specialized lending, Mr. Starnes said in April.
BB&T is not the only one moving aggressively into commercial real estate.
Royal Bank of Canada's RBC Capital Markets last September created a U.S. commercial mortgage division with offices in New York, Dallas, Chicago, Phoenix, and Newport Beach, Calif.